SHARES STRONGLY UP/DOWN this week 02/01/06 (Master RSI)

UK economy set to grow below long-term average again in 2006 - Citigroup

LONDON (AFX) - The coming year will be another difficult one for the UK
economy, with growth set to be below the long-term average once again, a leading
investment bank said today.
In a report titled 'The Fading Star', Citigroup's chief UK economist Michael
Saunders conceded that the drag on growth from surging oil prices will probably
diminish in 2006 but that high household debts, sluggish investment and rising
taxes will continue to weigh on the UK economy's prospects.
"As a result, 2006 probably will see only a modest pick-up in economic
growth, rising unemployment and, with public spending still growing quite
rapidly, another overshoot in the fiscal deficit," said Saunders.
Saunders expects UK GDP will rise by 2.3 pct in 2006 from 1.7 pct in 2005.
Though that is in line with the government's forecast, it remains below the
so-called long-term trend rate of the UK economy, thought to be just over 2.5
pct.
He added that the recent fall in the growth gap between the UK and the
12-nation euro zone will be reflected over time in a lower interest rate spread,
especially if inflation in the UK falls from current levels in the wake of cheap
imports and ample labour supply.
Most commentators think the European Central Bank will raise interest rates
again in the coming months, while the Bank of England's rate-setting Monetary
Policy Committee may decide to reduce them.
In December, the ECB raised its key refi rate to 2.25 pct, its first hike in
over five years. The MPC cut its key repo rate last August to 4.50 pct, its
first reduction in more than two years.
"The ECB is likely to hike rates again in 2006, but, unless sterling plunges
or equities soar, the MPC probably will cut again," said Saunders, who expects
UK rates to fall to 4.0 pct at the end of this year.